IBM 2015 Annual Report Download - page 93

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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securities that the company intends to sell or would more likely
than not be required to sell before the expected recovery of the
amortized cost basis are charged to other (income) and expense
in the period in which the loss occurs. For debt securities that the
company has no intent to sell and believes that it more likely than
not will not be required to sell prior to recovery, only the credit loss
component of the impairment is recognized in other (income) and
expense, while the remaining loss is recognized in OCI. The credit
loss component recognized in other (income) and expense is iden-
tified as the amount of the principal cash flows not expected to be
received over the remaining term of the debt security as projected
using the company’s cash flow projections.
Inventories
Raw materials, work in process and finished goods are stated at
the lower of average cost or market. Cash flows related to the
sale of inventories are reflected in net cash provided by operating
activities in the Consolidated Statement of Cash Flows.
Allowance for Credit Losses
Receivables are recorded concurrent with billing and shipment of
a product and/or delivery of a service to customers. A reasonable
estimate of probable net losses on the value of customer receiv-
ables is recognized by establishing an allowance for credit losses.
Notes and Accounts Receivable—Trade
An allowance for uncollectible trade receivables is estimated
based on a combination of write-off history, aging analysis and
any specific, known troubled accounts.
Financing Receivables
Financing receivables include sales-type leases, direct financing
leases and loans. Leases are accounted for in accordance with
lease accounting standards. Loan receivables are financial assets
recorded at amortized cost which approximates fair value. The
company determines its allowances for credit losses on financing
receivables based on two portfolio segments: lease receivables
and loan receivables. The company further segments the portfolio
into two classes: major markets and growth markets.
When calculating the allowances, the company considers its
ability to mitigate a potential loss by repossessing leased equip-
ment and by considering the current fair market value of any other
collateral. The value of the equipment is the net realizable value.
The allowance for credit losses for capital leases, installment sales
and customer loans includes an assessment of the entire balance
of the capital lease or loan, including amounts not yet due. The
methodologies that the company uses to calculate its receivables
reserves, which are applied consistently to its different portfolios,
are as follows:
Individually Evaluated—The company reviews all financing receiv-
ables considered at risk on a quarterly basis. The review primarily
consists of an analysis based upon current information available
about the client, such as financial statements, news reports, pub-
lished credit ratings, current market-implied credit analysis, as well
as the current economic environment, collateral net of reposses-
sion cost and prior collection history. For loans that are collateral
dependent, impairment is measured using the fair value of the col-
lateral when foreclosure is probable. Using this information, the
company determines the expected cash flow for the receivable
and calculates an estimate of the potential loss and the probabil-
ity of loss. For those accounts in which the loss is probable, the
company records a specific reserve.
Collectively Evaluated—The company records an unallocated
reserve that is calculated by applying a reserve rate to its differ-
ent portfolios, excluding accounts that have been specifically
reserved. This reserve rate is based upon credit rating, probabil-
ity of default, term, characteristics (lease/loan) and loss history.
Factors that could result in actual receivable losses that are mate-
rially different from the estimated reserve include sharp changes in
the economy, or a significant change in the economic health of a
particular client that represents a concentration in the company’s
receivables portfolio.
Other Credit-Related Policies
Non-Accrual—Certain receivables for which the company has
recorded a specific reserve may also be placed on non-accrual
status. Non-accrual assets are those receivables (impaired
loans or nonperforming leases) with specific reserves and other
accounts for which it is likely that the company will be unable to
collect all amounts due according to original terms of the lease
or loan agreement. Income recognition is discontinued on these
receivables. Cash collections are first applied as a reduction to
principal outstanding. Any cash received in excess of principal
payments outstanding is recognized as interest income. Receiv-
ables may be removed from non-accrual status, if appropriate,
based upon changes in client circumstances.
Write Off—Receivable losses are charged against the allow-
ance when management believes the uncollectibility of the
receivable is confirmed. Subsequent recoveries, if any, are cred-
ited to the allowance.
Past Due—The company views receivables as past due when
payment has not been received after 90 days, measured from the
original billing date.
Impaired Loans—As stated above, the company evaluates all
financing receivables considered at-risk, including loans, for
impairment on a quarterly basis. The company considers any
loan with an individually evaluated reserve as an impaired loan.
Depending on the level of impairment, loans will also be placed
on non-accrual status as appropriate. Client loans are primarily
for software and services and are unsecured. These loans are
subjected to credit analysis to evaluate the associated risk and,
when deemed necessary, actions are taken to mitigate risks in the
loan agreements which include covenants to protect against credit
deterioration during the life of the obligation.